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Operator
Good afternoon and welcome to Arcadia Biosciences' third quarter 2021 earnings conference call. Today's presenters will be Matt Flavan, President and CEO, and Pom Haley, Chief Financial Officer of Arcadia. This call is being webcast and you can refer to the company's press release at arcadiabio.com. Before we start, we would like to remind you that Arcadia Biosciences will be making forward-looking statements on this call. based on current expectations and currently available information. However, since these statements are based on factors that involves risk and uncertainties, the company's actual performance and results may differ materially from those described or implied today. You can review the company's safe harbor language in their most recently filed 10-Q. With that, I'll now turn the call over to Matt Flavin, President and CEO.
Matt Flavan
Thank you, Delphin. Hello, everyone, and welcome to our third quarter conference call. Thank you for joining us. I'll begin by saying that the third quarter has been marked by a heightened intensity of focus, building on the themes of capacity building, integration, and alignment that we discussed back in August. It has also been marked by strong financial results, a further validation of our successful transformation into a consumer products company. Our third quarter showed continued sequential growth during the year, with revenues up six-fold over prior year same quarter, and year-to-date we are up four-fold over the prior year to date. In addition, revenues are increasing sequentially during the year as well, with revenues up 70% Q2 over Q1 and 69% Q3 over Q2. To help ensure the positive momentum continues, we've been persistent, with our expanded bench of CPG talent in place in honing our focus, further refining our go-to-market strategies for 2022, and identifying ways to accelerate our path forward. To that end, the company has also made decisions regarding leadership. As we announced in September, I will be stepping down as CEO when a successor is identified. After planting the flag as a CPG company, we've made substantial progress in establishing a portfolio of plant-based, better-for-you food and wellness products. And we've done it in a remarkably short period of time. I'm very pleased with the brand platform that's now in place and primed to penetrate the market. At this point, having accomplished a lot of the foundational heavy lifting, the timing makes sense to begin the process of transitioning to a new leader, someone with deep experience running successful CPG organizations who will be able to build on our progress accelerate speed to market, and capitalize on the tremendous growth opportunities ahead. Our board has launched a national search, and that process remains underway. We are being deliberate in our approach and understand that finding the right person for the position is more important than adhering to a specific time frame, though we are making solid progress and continue to expect process to be completed by the end of the year. In the meantime, our company is keeping pace and moving forward with its plans, and I am concentrating on ensuring that the next leader will be able to hit the ground running when the baton is passed. That includes making critical decisions about where it makes sense to continue to invest resources for the long haul. But first, I'd like to provide updates on our product sales, the launch of our e-commerce business, and the multi-channel rollout of Good Wheat. Beginning with our body care products, we significantly expanded our distribution as compared to the prior year third quarter, which we believe bodes well for continued retail growth. We estimate the distribution for our three body care brands expanded by nearly 80% compared to the prior year, primarily driven by the launch of ProVault in Q1 2021. However, our body care product revenues for the quarter were actually down 42% year-over-year compared for the following two reasons. One, the global shipping crisis resulted in an approximately 300,000 in orders that were received but not fulfilled in Q3 and will shift into Q4. And two, in the prior year, as a result of the COVID pandemic, 470,000 in sanitizer revenues were recognized, which were temporary in nature. Excluding the impact of these two anomalies, our body care product orders actually increased 20%, year-over-year third quarter. Also, our Zola coconut water revenue was up 34%, and our GLA Sanova Saffol oil revenue was up 137% over the third quarter of last year. The increase in coconut water sales is due to category growth and strong brand performance, and our GLA sales are up due to higher pet food sales due to an expanded U.S. presence of our Canadian distributor, Royal Canin. Although revenues for these products were generally up, our revenue growth and gross margins are definitely being negatively impacted by the global shipping crisis, as well as the inflationary pressures affecting the U.S. economy. These dynamics have increased our costs in three primary ways. One, we've experienced a threefold increase in the cost of inbound international shipping, which has increased our product costs for Zola by more than 25%. Two, the arrival of our manufacturing automation equipment was delayed by 90 days, seriously compromising our planned automation efficiencies for the quarter. And three, we've experienced increased ingredient and material costs for a number of body care products, up to 100% in some instances. These three factors have temporarily driven gross margins for our body care products into single-digit territory. However, we've implemented discrete action plans to alleviate these pressures. With regard to the impact of inflation, we are evaluating our price elasticity by product to determine if there are opportunities to raise our prices without negatively affecting our sell-through volumes. Also, where possible, we are shifting from international suppliers to domestic suppliers where we have better supply assurance. And as of a few weeks ago, we've received all of our automation equipment on site and and expect to complete implementation of our automation in due course. We expect these initiatives will have a material impact on improving our margins, but we also recognize that shipping costs and inflation are expected to persist into the foreseeable future and may worsen before they get better. So this will continue to be an area of critical focus. Shifting for a moment to our operating milestone achievements during the quarter, let me begin with our e-commerce initiatives. A primary focus during the quarter has been the build-out of our new body care e-commerce sites to begin driving online sales through robust performance marketing. As I mentioned previously, historically, our retail product sales are roughly 90% brick and mortar, and with little investment to date in promoting our products online, we believe e-commerce sales to be an untapped source of new revenue. That being the case, I'm pleased to say that as of October 29th, we've launched our new ProVault site at getprovault.com, and we recently began our digital marketing and advertising campaign. We're in the early phase of testing our performance marketing strategies, honing and refining them to maximize traffic to the site and conversion of impressions to purchases. Also, we remain on track to have the remaining two product sites launched by the end of the year, including the rebranded Savvy e-commerce website, SavvyNaturals.com, with all new product, packaging, and design, and the optimized Soul Spring commerce site, which is MySoulSpring.com. As for our Good Week Pasta launch, we are tracking for a full-scale launch of five pasta SKUs in Q1 of 2022, including a full-scale performance marketing push. This is a slight modification to our prior expectation for a soft launch in December and then a full-scale launch in January. The shipping crisis has also affected the readiness of our contract manufacturer to provide packaging and products as of January. Therefore, we're broadening the estimated launch timing to Q1 this to account for these expected delays. Next, I'd like to share a little about our progress to date in preparing our Good Wheat Pasta products for entrée into the consumer retail channel. Our team has invested meaningful resources to ensure we have a consumer preferred package for our Good Wheat Pasta. We tested several variations to identify the most impactful design. The package we will launch has strong purchase intent and in fact outscores category norms for purchase intent as well as uniqueness. Our selected design also breaks through on shelf and will translate well across categories as we expand the brand in the future. A final milestone highlight for the quarter is our successful harvest of over 20,000 pounds of Hawaiian hemp biomass. We are currently processing the biomass and expect the resulting output to be be one of the largest supplies of Hawaiian CBD on the market today. In cooperation with our Archipelago joint venture partner, we will continue to evaluate the optimal monetization strategy for this asset. Turning now to a look forward, I'll say a word about our goals for the balance of 2021 and early 2022. As we reflect on the market interest for our consumer products, one thing is clear. The channels to market and the number of product category opportunities are numerous, and collectively they exceed our resource bandwidth to pursue all of them at once. Therefore, focused execution on select opportunities remains critical to our continued success. Especially over the next 24 months, we are carefully staging our resources to conserve cash while focusing on the following key initiatives that we believe build the foundation for sustained growth. First, launch and scale up of our body care products online. Second, expand our body care brick and mortar retail business by focusing on innovation within our existing brands to drive organic growth as well as continuing to add new doors. And third, introduce our good wheat pasta online and in retail stores drive sales, and earn meaningful brand recognition in 2022. We believe successful execution of these three initiatives will drive encouraging near-term revenue growth, meaningfully build our brands, and position us favorably to enter new channels and product categories in due course. We're also putting in place measures to reduce our forward operating expense run rate. For instance, now that we've produced a sufficient ingredient supply of our Hawaiian CBD and we are winding down our cultivation activities. The same is true for our good hemp seed cultivation. We've wound down production operations since the hemp seed market is saturated. With that, I'll turn the call over to Pam for an update on our financials. Pam?
Delphin
Thank you, Matt. I'd like to take a few moments to share the financial highlights for the recent quarter and year-to-date with you now. As Matt mentioned at the onset of the call, we are pleased with the revenue performance of the brands acquired last quarter, Q2. Total revenues recognized for third quarter 2021 were $2.4 million compared to $314,000 in third quarter 2020, with a majority of the $2.1 million increase driven by the acquisition of the portfolio of body care products and Zola coconut water, in addition to higher GLA sales this quarter. The year-to-date increase in revenues of $3.7 million were mostly attributable to the acquired brands as well, as they generated $2.6 million of revenue in addition to good hemp seeds, good wheat grain, and increased GLA sales this year to date. Total operating expenses of $11.1 million in Q3 2021 were $3.2 million higher than the $7.9 million recognized in Q3 2020, and total operating expenses of $26.3 million Q3 2021 year to date were $5.2 million higher than the $21.1 million recognized Q3 2020 year-to-date. Cost of product revenues were $2.5 million in Q3 2021 versus $1.8 million in Q3 2020 and $5 million in Q3 2021 year-to-date versus $3.5 million in Q3 2020 year-to-date. The $670,000 year-over-year increase for the quarter was primarily driven by the product sales of the portfolio of newly acquired brands, partially offset by lower inventory write-downs this year versus last. Write-downs charged to COGS totaled $449,000 in the third quarter 2021 for the adjustment to fair market value of the commodity hemp seeds in inventory and the destruction of hemp crops due to disease, with $1.5 million of write-downs in third quarter 2020. As for year-to-date, the $1.5 million increase in COGS over the same period in the prior year was driven by the same factors. R&D expenses for the quarter were $1 million in 2021 as compared to $1.8 million in third quarter 2020 and $3.3 million third quarter year-to-date compared to $6 million third quarter 2020 year-to-date. The decrease for both periods was driven primarily by lower employee-related expenses and as we've restructured our research teams to move from true research and discovery work to the development and commercialization phase of our consumer products. In addition, we no longer have the vertica-related expenses in 2021 that were present in 2020, with the sale of our share of the joint venture in November of last year. Partially upsetting the favorability for the quarter and year-to-date in 2021 is an expense of $333,000 recognized for the release of product from inventory that was not commercialized by Arcadia. A write-down for the impairment of fixed assets in the amount of 1.1 million was recorded in third quarter of 2021 and is associated with the agricultural and extraction equipment within our archipelago joint venture. As Matt noted, we have successfully harvested over 20,000 pounds of hemp biomass that is en route to be processed into CBD oil. We have produced a sufficient quantity of biomass and are not able to extract CBD oil in Hawaii in the near future due to regulatory restrictions still in place. As a result of these regulatory challenges and of unfavorable hemp CBD market conditions, we have assessed the archipelago assets for impairment and recorded the write-down. Selling general and administrative expenses totaled $6.3 million in the third quarter of 2021, a $2 million increase from the $4.3 million recognized in third quarter 2020. Third quarter year to date, 2021, SG&A expenses totaled $16.8 million, a $5.1 million increase from the $11.7 million recognized third quarter year to date for 2020. The increase for both periods is attributed primarily to the additional salaries and benefits associated with the increased headcount. Marketing, advertising, and consulting activities increased during 2021 as expected in preparation for product launches. Net loss attributable to common stockholders was $2.2 million in the third quarter of 2021 compared to $6.4 million in the third quarter of 2020 and $5.4 million in the first nine months of 2021 compared to $13.6 million in the first nine months of 2020. The operating activity has been addressed, so I'll give a little more detail on the other components. The third quarter of 2021 included a non-cash credit to expense of $4.8 million for the change in the fair value of warrant liabilities from the end of Q2 to the end of Q3 2021, while Q3 of 2020 included a $1.1 million credit for the change. Specific to this current quarter is a gain recognized on the extinguishment of the $1.1 million Paycheck Protection Program loan that was funded last year as we received notification of forgiveness. Third quarter of 2020 included a $682,000 loss on the extinguishment of warrant liability, while there was no such activity in third quarter of 2021. We recognized a gain of $10.2 million in the second quarter of 2021 on the sale of BioSeries stock. So this concludes our financial highlights for the third quarter and third quarter year to date of 2021. Thank you very much, and I'll turn the call back over to the operator for questions.
Operator
Thank you, Pam. To all our participants, if you have a question at this time, please press star and number one on your touchtone telephone. Again, press star one. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And now our first question comes from Ryan Myers of Lake Street Capital. Please go ahead, sir.
Ryan Myers
Yep. Hi, guys. Thanks for taking my questions. First one for me, I just wanted to get some insight on your guys' level of confidence in launching the GoodWeat 5 product SKUs in the first quarter of 2022. If you think some of the headwinds that delayed the soft e-commerce launch in the fourth quarter here will subside by then?
Matt Flavan
Thanks, Ryan. I would say we have high confidence that as we understand the implications or the impact of the shipping delays on our co-packer, that Q1 is reasonable. But I want to be – I'm cautiously – we're cautiously optimistic simply because this has been difficult to predict, and we want to be careful. But suffice it to say that the date we're expecting is not at the end of the quarter, so we've baked in a little bit of time for additional delays. Don't expect them. Don't know that they're happening, or don't have any reason to expect that they're happening. We think we've baked in enough cushion, but – At the same time, again, it's been difficult to predict. So we feel good about Q1 now, and I think I'd say we have high confidence.
Ryan Myers
Okay, that's helpful. And then what are you guys hearing so far from some of the retail partners about the Good Week products ahead of the launches in 2022? Yeah.
Matt Flavan
A lot of interest and enthusiasm for the product and its nutritional profile. It's really about lining up with the category reviews and the timing of those reviews. We expect to see good things from some of the larger chains that we currently have relationships with on our body care products.
Ryan Myers
Okay, that's helpful. And then just wondering if there's any other investments that you guys want to call out that you're making ahead of both these product launches, whether it's on the R&D side or the selling and marketing side of things.
Matt Flavan
So I would say that the primary investments are in what we covered, which would be taking the body care products into the online space, which requires a you know, fairly sophisticated website with data analytics that enable you to target, you know, discreetly target consumers and, you know, evaluate the performance marketing and potentially scale up those digital brands to drive revenue. And our hope is that, you know, every dollar towards digital advertising produces reasonable or reasonable is a good conversion to revenue dollars. So that's where I think you'll see a fair amount of investment here in the early 2022 during the launches over the next, you know, 90 days and into early 2022.
Ryan Myers
Okay. And then last question for me, do you plan to still do some sort of e-commerce launch on the good wheat side? Or are you guys just looking to go straight into the retailers in the first quarter?
Matt Flavan
So let me clarify. Thanks for asking that. The actual full-scale launch we're referring to is online initially, and what we were thinking we would do previously was start with a single SKU in December to begin collecting data. So the Q1 launch is actually the e-commerce online launch for GoodWeed, and shortly thereafter would follow that. traction in the brick-and-mortar retail space.
Ryan Myers
Okay. That's it for me. Thank you.
Matt Flavan
Thanks, Ryan.
Operator
And our next question is from Ram Salvaraju of HC Wainwright. Go ahead, sir.
Ram Salvaraju
Hi there. This is Maz on for Ram. Thanks for taking our questions. So through your acquisitions of Agrasys Leaf and Solar, you've transformed into a vertically integrated food company. Do you plan to integrate your proprietary food innovations into these acquisitions? So, for example, could we in-house breeding technology into the Agrasis products?
Matt Flavan
You know, that's something that we had originally considered. It would be a strategic opportunity that would make sense or potentially make sense for us. In the spirit of focusing in the near term, we will simply be focused on launching Good Wheat online and in retail in the U.S. So we've really kind of set aside pursuing other potential strategic opportunities until we've demonstrated the kind of traction that we think is appropriate and important to leverage into other channels thereafter.
Ram Salvaraju
Okay, thank you. And then could you please update us on your Good Wheat presence in Europe in the context of the partnership with Good Mills Innovation?
Matt Flavan
Yes. So Good Mills continues to develop the ability to produce or breed into local varieties so that they can have their own production of good wheat to serve their markets. They've continued to progress However, COVID and kind of the economic challenges associated with it have slowed them more than they would like. But their enthusiasm for the product and their commitment to be the largest miller selling good wheat remains intact. And I think they're looking to 2022. as the year that they demonstrate that first online through their e-commerce strategy. And so we remain committed and together working to bring Good Wheat to Europe through Good Mills.
Ram Salvaraju
That's very helpful. Thank you. And just finally, you gave us some color on the GoodWe Direct to Consumer digital marketing efforts. Do you have any indication or can you give us any more color in terms of customers gained quarter over quarter or any other metrics?
Matt Flavan
So for the body care products, we are just – Bringing those sites up, and so we have no sales to report just yet. We expect, since they're going to all be up by the end of the year, we would have something to report out in Q1. And since Goodweed is also similarly being launched in Q1, we'll expect to have initial feedback as of Q1 as well for the metrics around the sales for those products.
Ram Salvaraju
Okay, thank you. Congrats, and thanks for taking our questions.
Matt Flavan
Thank you.
Operator
Well, despite I'm not showing any further questions, now I would like to turn the call over to the President and CEO, Mr. Matt Blavin. Please continue.
Matt Flavan
Thank you. To close out the call, we are very pleased with our continued progress and the steps we've taken to hone our focus and strategically deploy our resources for maximum impact. The company is well-positioned to execute it on its plans. with the goal of elevating our brands, further penetrating the consumer health and wellness category, and creating shareholder value. Thank you again for joining us today, and have a great afternoon.
Operator
Ladies and gentlemen, thank you for your participation in today's conference, and this concludes today's program. You may now all disconnect. Everyone, have a great day.
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